Restoration Hardware 2015 Annual Report Download - page 52

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In fiscal 2014, we concluded that we were the deemed owner for accounting purposes for a new distribution center located in
California during the construction period pursuant to ASC 840. During the construction period, we capitalized the cash and non-cash
assets contributed by the landlord for the construction of the distribution center on our consolidated balance sheets as an increase in
property and equipment and an increase in financing obligations under build-to-suit lease transactions. During the fourth quarter of
fiscal 2015, upon the completion of the construction period, we performed a sale-leaseback analysis and determined that we did not
have any prohibitive forms of continuing involvement and therefore removed the asset and corresponding liability of $74.9 million
from our consolidated balance sheet as of January 30, 2016. The effected sale leaseback did not have an impact on the consolidated
statements of income or consolidated statements of cash flows in fiscal 2015.
Convertible Senior Notes
0.00% Convertible Senior Notes due 2020
In June 2015, we issued in a private offering $250 million principal amount of 0.00% convertible senior notes due 2020 and, in
July 2015, we issued an additional $50 million principal amount pursuant to the exercise of the overallotment option granted to the
initial purchasers as part of our June 2015 offering (collectively, the “2020 Notes”). The 2020 Notes are governed by the terms of an
indenture between us and U.S. Bank National Association, as the Trustee. The 2020 Notes will mature on July 15, 2020, unless earlier
purchased by us or converted. The 2020 Notes will not bear interest, except that the 2020 Notes will be subject to “special interest” in
certain limited circumstances in the event of our failure to perform certain of our obligations under the indenture governing the 2020
Notes. The 2020 Notes are unsecured obligations and do not contain any financial covenants or restrictions on the payments of
dividends, the incurrence of indebtedness or the issuance or repurchase of securities by us or any of our subsidiaries. Certain events
are also considered “events of default” under the 2020 Notes, which may result in the acceleration of the maturity of the 2020 Notes,
as described in the indenture governing the 2020 Notes. The 2020 Notes are guaranteed by our primary operating subsidiary,
Restoration Hardware, Inc., as Guarantor. The guarantee is the unsecured obligation of the Guarantor and is subordinated to the
Guarantor’s obligations from time to time with respect to its credit agreement and ranks equal in right of payment with respect to
Guarantor’s other obligations.
The initial conversion rate applicable to the 2020 Notes is 8.4656 shares of common stock per $1,000 principal amount of 2020
Notes, which is equivalent to an initial conversion price of approximately $118.13 per share. The conversion rate will be subject to
adjustment upon the occurrence of certain specified events, but will not be adjusted for any accrued and unpaid special interest. In
addition, upon the occurrence of a “make-whole fundamental change” as defined in the indenture, we will, in certain circumstances,
increase the conversion rate by a number of additional shares for a holder that elects to convert its 2020 Notes in connection with such
make-whole fundamental change.
Prior to March 15, 2020, the 2020 Notes will be convertible only under the following circumstances: (1) during any calendar
quarter commencing after September 30, 2015, if, for at least 20 trading days (whether or not consecutive) during the 30 consecutive
trading day period ending on the last trading day of the immediately preceding fiscal quarter, the last reported sale price of our
common stock on such trading day is greater than or equal to 130% of the applicable conversion price on such trading day; (2) during
the five consecutive business day period after any ten consecutive trading day period in which, for each day of that period, the trading
price per $1,000 principal amount of 2020 Notes for such trading day was less than 98% of the product of the last reported sale price
of our common stock and the applicable conversion rate on such trading day; or (3) upon the occurrence of specified corporate
transactions. As of January 30, 2016, none of these conditions have occurred and, as a result, the 2020 Notes are not convertible as of
January 30, 2016. On and after March 15, 2020, until the close of business on the second scheduled trading day immediately
preceding the maturity date, holders may convert all or a portion of their 2020 Notes at any time, regardless of the foregoing
circumstances. Upon conversion, the 2020 Notes will be settled, at our election, in cash, shares of our common stock, or a
combination of cash and shares of our common stock.
We may not redeem the 2020 Notes; however, upon the occurrence of a fundamental change (as defined in the indenture
governing the notes), holders may require us to purchase all or a portion of their 2020 Notes for cash at a price equal to 100% of the
principal amount of the 2020 Notes to be purchased plus any accrued and unpaid special interest to, but excluding, the fundamental
change purchase date.
Under GAAP, certain convertible debt instruments that may be settled in cash on conversion are required to be separately
accounted for as liability and equity components of the instrument in a manner that reflects the issuer’s non-convertible debt
borrowing rate. Accordingly, in accounting for the issuance of the 2020 Notes, we separated the 2020 Notes into liability and equity
components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does
not have an associated convertible feature. The carrying amount of the equity component, which is recognized as a debt discount,
represents the difference between the proceeds from the issuance of the 2020 Notes and the fair value of the liability component of the
2020 Notes. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) will be
amortized to interest expense using an effective interest rate of 6.47% over the term of the 2020 Notes. The equity component is not
remeasured as long as it continues to meet the conditions for equity classification.